Pimco’s Gross: I Like Stocks Over Bonds for the Long Term

The manager of the world’s largest bond fund likes stocks over fixed-income investments for long-term investors these days, at least while monetary policy remains ultra-loose.

The Federal Reserve has said it will buy $40 billion a month in mortgage-backed securities from banks, a monetary policy tool known as quantitative easing that seeks to spur the economy and create jobs by flooding the financial system with liquidity and pushing down borrowing costs.

“It props up not only bonds in terms of their prices and lowers their yields but it props up stocks as well. I look to the Fed in terms of their check-writing to influence both markets,” Gross told CNBC.

Which one is the better market?

“I think ultimately, over time, that stocks — that high quality stocks, which return 2 to 3 percent, in terms of a dividend yield — are certainly a more attractive alternative relative to a 10-Year Treasury at 1.7 percent,” Gross said.

“But let’s face it,” he added. “Both of them are bubbled to a certain extent by what the Fed is doing.”

The Fed has pumped trillions of dollars into the economy via two previous rounds of quantitative easing rolled out since the 2008 financial crisis.

Supporters say the policy tool is necessary to steer the country away from deflationary decline while fostering conditions ripe for investing and job creation.

Critics dub the policy as printing money out of thin air and say it plants the seeds for inflation down the road and add the upside has been higher stock prices but little in the way of job growth.

Still, Fed officials say they are going to keep their foot on the accelerator until the economy improves, particularly the labor market.

“It appears that the economy is growing at a pace such that, absent policy action, progress on reducing unemployment will likely be slow for some time,” Fed Governor Jeremy Stein told an event at the Brookings Institution, according to Reuters.

“Given where we are, and what we know, I firmly believe that this decision was the right one.”

Other experts point out, however, that the Fed’s latest round, known widely as QE3, will achieve muted success because stock prices are already high due to past interventions, and unlike in 2008, today’s measures aren’t accompanied by fiscal stimulus programs.

“In short, QE3 reduces the tail risk of an outright economic contraction, but is unlikely to lead to a sustained recovery in an economy that is still enduring a painful deleveraging process,” New York University economist Nouriel Roubini wrote in a recent Project Syndicate column.

“In the short run, QE3 will lead investors to take on risk, and will stimulate modest asset reflation. But the equity-price rise is likely to fizzle out over time if economic growth disappoints, as is likely, and drags down expectations about corporate revenues and profitability.”